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What Is a Pay Adjustment?
Whether you’re making promotions, trying to retain an employee, or going through budget cuts, you may need to adjust compensation in your company. Making these changes can be a clunky process if you’re doing them without software. If you’re decreasing compensation, you may run into some added tension with the affected employee.
These changes to compensation, which can be for a single employee or many, are called pay adjustments.
Pay Adjustment Definition
A pay adjustment is an increase or decrease in an employee’s salary or wage. Pay adjustments can be temporary, but they are not one-time changes made for payroll mistakes.
Why You Might Make a Pay Adjustment
There are many different reasons for pay adjustments. They can be influenced by external or internal factors, and they can be proactive or reactive depending on the circumstances. Here are the most common types of pay adjustments.
It may be that the employee’s salary is no longer competitive. If other companies are paying more for the same job, then the employee may decide to seek other opportunities. Pay adjustments help retain these employees by bringing their salaries up to par with their competitors.
Cost of Living
Pay adjustments are commonly used to account for changes in the cost of living where the employee works. Adjustments can be made either because the surrounding area’s cost of living is increasing, or because the company has transferred an employee.
Current Pay Does Not Reflect Job Duties
Pay adjustments can be made to accommodate changes in an employee’s duties, such as increased responsibilities, hours, or job difficulty. These types of pay adjustments are sometimes paired with a job title change.
Companies make a decreasing pay adjustment for an employee who has been demoted. Although demotion-related pay adjustments are difficult to navigate, they are necessary to maintain pay equity in the company.
Pay equity is important for employee morale and legal compliance. Pay adjustments are commonly made to ensure pay equity amongst employees.
Changes in Shifts/Hours
Some companies have different wages for different shifts or hours. If an employee switches from one to the other, they’ll need a pay adjustment. For example, since third-shift employees are usually paid more money for working at night, any employee who switches to that shift will need their wages adjusted.
Every year, inflation reduces the value of a dollar. Pay adjustments made for inflation ensure that even though each dollar is worth less, the employee’s compensation still has the same value.
Market adjustments are very much like adjustments due to competition. The only difference is that market adjustments are usually made by looking at industry-wide compensation data to make adjustments instead of specific competitors that you may be losing talent to.
Merit raises are made to recognize an employee’s great performance. Merit raises are often scheduled after yearly performance reviews.
Unfortunately, pay adjustments to lower wages may be necessary to prevent layoffs. These types of pay adjustments are typically made either across the entire company or in certain departments.
Employees should receive a pay increase when they are promoted to a new position within the organization.
Temporary pay adjustments may be necessary if an employee is taking on additional responsibilities for a limited period of time. For example, if an employee quits unexpectedly, another employee may need to take on additional responsibilities while the position is filled.
Raises for tenure are common, and help retain employees for longer periods of time. These raises can occur every year or at particular milestones. For example, raises may be made every five years.
How to Make a Pay Adjustment
Now that we’ve discussed why you might need to make a pay adjustment, let’s look at how. Pay adjustments need to be managed differently depending on the reason for the change and whether it’s an increase or decrease. Still, there are some basic steps involved in every pay adjustment.
Step 1: Determine the Extent of the Pay Adjustment
The first thing you need to do is decide what the pay adjustment will be. If the pay adjustment is an increase, you may have predetermined schedules for increases based on percentage, company growth, or other factors. If you don’t have any predetermined pay increase schedules, consider doing the following:
- Communicate with leadership. Discuss pay adjustment options with leadership and supervisors to get input regarding the extent of the pay adjustment.
- Study relevant historical pay increases. Reports showing compensation levels either within a job category, family, or across the company can help you understand the company’s past practice and what changes should be made.
- Obtain market data. If the purpose of the pay adjustment is to keep the position competitive or in line with the current job market, you’ll want to obtain salary data to use for comparison.
Step 2: Communicate with Relevant Leadership and Supervisors
Once you know what the pay adjustment will be, you’ll want to communicate the adjustment to relevant leadership and supervisors. It’s extremely important that supervisors are aware of the nature of the pay adjustment, the amount, and the reason. This is particularly the case if the pay adjustment is a decrease, since the employee may become upset upon learning of the decrease.
Step 3: Check for Inequities and Legal Compliance Issues
To avoid legal challenges and be fair, pay adjustments must be in compliance with relevant laws. Here are four areas to check.
Pay adjustments can lead to pay discrimination. For example, if a manager consistently gives merit raises only to men, this is evidence that their decision is biased. If the decision was biased, then the company could face violations of Title VII of the Civil Rights Act of 1964, among other anti-discrimination laws.
Other laws in addition to Title VII that prohibit pay discrimination include:
- The Equal Pay Act of 1963 (EPA)
- The Age Discrimination in Employment Act (ADEA)
- The Americans with Disabilities Act (ADA)
- Applicable state laws
Fair Labor Standards Act (FLSA) and Other Wage and Hour Laws
Pay adjustments must comply with wage-and-hour laws such as FLSA and state-level wage-and-hour laws. Even if pay adjustments need to be made due to new budget constraints, pay cannot fall below the federal minimum wage, nor can it fall below the applicable state or local minimum wage.
It’s worth noting that some industries are not covered by FLSA, such as agriculture. If this is the case, be sure to check any industry-specific laws that might impact pay adjustments, like the Agricultural Worker Protection Act (AWPA).
Employment Contract and Union Requirements
If your employee is under contract or belongs to a union, you may not be able to make any pay adjustments. Before making any changes, consult the employee’s contract or the union’s Collective Bargaining Agreement (CBA).
When Pay Adjustments are Legally Prohibited
There are a few laws that prohibit pay adjustments in specific instances. For example, you can’t reduce an employee’s pay because they had jury duty, and in many states, you have to provide paid time off for voting.
Depending on the state and industry, anti-retaliation laws such as whistle-blower statutes also prohibit retaliatory payment reductions.
Step 4: Communicate the Change to the Employee
Regardless of whether the pay adjustment is an increase or a decrease, it’s important to have a communication plan in place. For example, if the company is about to decrease pay for multiple employees, all employees should be notified at the same time.
Any decrease will be disappointing for any employee, and they may become upset. Although you may not be able to make the employee feel much better, with some preparation you’ll be able to navigate the conversation professionally. If you’re communicating a decrease, be sure to bring any necessary paperwork.
Step 5: Adjust Payroll, Including Deductions
The last step is to make the change either manually or in your payroll software. If you have payroll software, it will be as easy as entering the new amount. However, if you’re doing it manually, you’ll have to recalculate gross pay, deductions and contributions, and net pay.
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